Xerox Canada Ltd. v Accurate Data Services Inc., 2013 ABQB 735

Court of Queen ’ s Bench of Alberta Citation: Xerox Canada Ltd. v Accurate Data Services Inc., 2013 ABQB 735 Date: 20131213 Docket: 1301 04911 Registry: Calgary Between: Xerox Canada Ltd. Plaintiff - and - Accurate Data Services Inc. Defendant - and - Segue Systems Inc. Third Party _ ________________________________________ ______________ Memorandum of Decision of Andrew R. Robertson , Master in Chambers _________________________________________ ______________

Introduction [ 1 ] This is an application for

summary judgment by the supplier of business equipment that was leased to the Defendant. The Defendant has defaulted on the lease payments, the Plaintiff has seized the equipment, and seeks

summary judgment both for the arrears in payments and for the present value of the remaining lease payments, which it says are liquidated damages as set out in the written lease agreement. The Plaintiff also seeks interest, at the contract rate, and solicitor and client costs. [ 2 ] The claim is based on a standard form agreement. The Plaintiff relies heavily on the “fine print” in its standard form. The case calls for a careful review of the wording of the agreement, as well as: (

a) the concept of “liquidated damages”, (

b) the relevance of mitigation of damages by the creditor, and (

c) a claim for solicitor and own client costs. [ 3 ] For the reasons set out herein, I dismiss the application for

summary judgment and I comment on the claim for solicitor and own client costs. Facts The Lease [ 4 ] The Plaintiff, Xerox Canada Ltd. (“ Xerox ”) leased certain business equipment to the defendant, an Edmonton business, Accurate Data Services Inc. (“ Accurate ”) by written agreement dated September 30, 2010 (the “ Lease ”). The Lease provided for 20 quarterly payments of $3,000.00 each. Failure to pay constituted an Event of Default, which in turn entitled Xerox to certain remedies. The Lease provided for interest on late payments at 18 per cent per annum. [ 5 ] The Lease provided in subsection L6(

b) that upon the occurrence of an Event of Default (as defined) Xerox may: Render the Equipment and/or Software inoperable and take possession of the Equipment and/or Software wherever it is located. Customer agrees that it will not make any claim nor cause any claim to be made, nor will Xerox be liable for any damages caused as a result of taking possession of the Equipment and/or Software. Xerox’s action of taking possession shall not prejudice Xerox’s other rights under this Agreement or otherwise.

Upon taking possession of the equipment and/or Software, Xerox shall be entitled to sell, lease or otherwise dispose of the Equipment on terms it considers reasonable; [ 6 ] As well, under subsection L6(c), in the event of an Event of Default Xerox could consider the Lease agreement repudiated and after giving written notice of that position, it could recover as liquidated damages an amount equal to (quoting the Lease):

I) The aggregate net present value of all Periodic Payments that would have become due between the Event of Default and the expiration of the Initial Term of this Agreement, or any extension to the Term as if the Event of Default had not occurred.

The net present value of each Periodic Payment shall be calculated by discounting each such Periodic Payment back to the date of the Event of Default accrued at a discount rate of 5% per annum; plus II) All amounts hereunder previously due and unpaid up to the Event of Default; plus III) Any administrative and legal expenses as reasonably determined by Xerox; plus IV) An amount equal to any sales taxes, goods and services, or value added, or harmonized sales taxes that Xerox is required to remit to a government authority in respect to the foregoing. This subsection (

c) represents a genuine pre-estimate of the damage suffered by Xerox upon repudiation and it is not regarded as a penalty by Xerox and Customer; The Amounts Claimed [ 7 ] Clause L8 of the Lease provides that at its conclusion the customer would have the option to purchase the Equipment, “financed pursuant to this Agreement at the fair market value of the Equipment, as determined by Xerox as of the date of the exercise and title will transfer as is – where is at Customer’s risk without any representation or warranty”.

If the customer did not exercise that option, the Lease provides that the equipment is to be returned to Xerox “in the same condition as it was on the date of delivery, reasonable wear and tear excepted.” [ 8 ] Xerox re-possessed the equipment on December 21, 2012. That was two years and almost three months after the lease was dated. After repossession, Xerox did not re-lease or re-sell the equipment. In cross-examination, Xerox’s representative admitted that he did not know what had happened to the re-possessed DCP machine, which is one of the machines subject to the lease.

He also did not know if Xerox had in the past ever re-sold or re-let equipment to other parties after repossession. In response to an undertaking he said that the DCP was delivered to a Xerox warehouse and has been dismantled for parts. [ 9 ] Given the fact that this was a five year lease and Xerox repossessed almost half way through the term of the Lease and did not even bother to keep any record of what happened to the repossessed machines except that they were stripped for parts, it is apparent that the anticipated value at the end of five years would be nominal at best.

The payments under the Lease, although it is structured as a Lease, seem clearly to have been intended simply to pay for the equipment leased over the five year term; hence the reference to the equipment being “financed” in clause L8 even though the transaction was a lease.

[10] In fact, the Lease agreement is structured as either a purchase agreement or a lease agreement, depending on what is filled inunder the heading “Contract Type” on the first page. Here, it says “Lease”.

Had it said “Sale”, the same form of agreement wouldapparently have been used. [11] Xerox seeks judgment in this application for $14,122.14 for rental payment arrears, $33,323.85 for the net present value of thebalance of the lease payments which are claimed as “liquidated damages” and interest of $5,273.40 at the contract rate of 18 per cent, aswell as solicitor and own client costs of $18,516.00 including GST.

The claim for solicitor and own client costs also is said to be part ofthe calculation of liquidated damages. [12] The affidavit of David Poretti, the General Manager employed by Xerox, attached an exhibit that purports to explain thecalculation of the $33,323.85 figure for liquidated damages, being the net present value of the remaining payments. It also claimsadministrative fees that are not explained, being $350 times two.

The sheets that purport to explain the calculation of the net presentvalue refer to “Compound Period: Quarterly Nominal Annual Interest Rate: 5.000%” and then there is a heading that says, “AmortizationSchedule – Normal Amortization” but the actual calculations of the figures that follow are not present. [13] Xerox’s lawyers sent two different demand letters. [14] The first demand letter came from in-house counsel in Toronto, dated December 6, 2012.

It demanded payment by December17, 2012 failing which Xerox said it would commence an action and seek an injunction requiring the delivery of the equipment or anappointment of a receiver over the equipment. As well the letter claimed “Repudiation Damages” of $33,700.00.

The letter alsoenclosed a Notice of Intention to Enforce Security pursuant to the Bankruptcy and Insolvency Act. [15] I conclude that the amount of $33,700.00 said to be “Repudiation Damages” must have been intended to refer to the liquidateddamages claim, although the amount does not exactly correspond. [16] The second demand letter was sent by Xerox’s outside counsel, dated March 5, 2013. It simply demanded payment of$47,395.85 as “indebtedness” without any direct reference either to “Repudiation Damages” or liquidated damages.

A schedulepurporting to set out details of the “indebtedness” was attached, but it says nothing about the net present value of the future payments,and in fact it lists what appears to be every invoice from October 7, 2011 to February 11, 2013, although not in chronological order. Twoof them are dated December 28, 2012, one for $22,529.85 and the other for $10,794.00. These figures total $33,323.85 which is ofcourse the liquidated damages amount now claimed. Therefore, although the letter did not clearly explain how the figure of $47,395.85was arrived at, it included the claim for liquidated damages.

The Respondent’s Position [17] The arguments put forward on behalf of Accurate are to the effect that it was upsold on the equipment beyond its needs andhas been trying to return the equipment to Xerox. It says that Xerox has not mitigated its claim for damages by retrieving the equipmentmuch earlier (when invited to do so by Accurate) and by not selling or re-leasing to others, or even trying to do so. Proceedings to Date [18] The claim has proceeded through pleadings and production of documents. A Third Party Notice has been issued against thesales organization that negotiated the transaction.

This In support of this applicaton for

summary judgment, Xerox filed two affidavits bytwo different deponents: Mr. Poretti, and Nayan (or Nyan) Parekh, an employee of its Collections Department. Mr. Poretti was cross-examined on his Affidavit. Accurate filed an Affidavit explaining its perspective on the transaction and its attempt to return theequipment and acquire equipment more appropriate to its needs. [19] Xerox sued in the Judicial Centre of Calgary, although the facts have no connection with Calgary. Accurate Data leased theequipment in Edmonton, where it carries on business.

The law firm retained by Xerox in Alberta has an office in Calgary; that wasapparently the reason for suing here. Accurate has applied to move the case to Edmonton if the matter proceeds. For the purposes of thesummary judgment application, counsel for Accurate was content to argue it here in Calgary. The Test for

Summary Judgment [20] Xerox seeks

summary judgment. I do not intend to review in detail the various statements of law from the Courts in Albertaas to the appropriate test for obtaining

summary judgment. The Court of Appeal of Alberta has referred to the test as being whether thereis a “genuine issue of material fact requiring a trial” and asked whether the outcome is “plain and obvious”: Lameman v. Canada(Attorney General), 2006 ABCA 393, rev’d on other grounds at 2008 SCC 14. Other cases ask whether the respondent’s case is“hopeless”: Braunwarth v. Bank of Montreal, 2004 ABQB 790 at para. 32. Regardless of how the test is characterized, the bar is high. [21] On a

summary judgment application, each side must “put its best foot forward” with respect to the existence or non-existenceof material issues to be tried: Trans-America Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), (ON SC), 28 O.R.(3d) 423 at p. 434, as cited in Canada Lameman, above, at para. 11. The Issues [22] The specific issues before me appear to be these:

1. Is there an issue – at all - relating to Xerox Canada’s alleged failure to mitigate its damages? Xerox made no attempt tomitigate the damages, has not accounted for the value of the parts taken from the returned machines, and says it does not have to. It saysthat mitigation of damages is simply not a factor for consideration when the contract provides for liquidated damages. 2. That, in turn, brings to play the question as to the enforceability of the liquidated damages clause in the Lease.

Althoughthe enforceability of the clause was not directly pleaded, the law supports the assertion that if the contract in question has an enforceableliquidated damages clause, then mitigation is not to be considered. But does the clause here describe a reasonable pre-estimate ofdamages? If not, the clause may not be enforceable, and then the issue of mitigation, or rather the lack thereof, is a material issue fortrial. 3. In any event, has the plaintiff brought forward enough evidence to satisfy the requirements of

summary judgment? 4. If judgment is granted in favour of Xerox, is Xerox entitled to costs assessed on the “solicitor client” basis as opposed to“party and party” basis as set out in

Schedule “C” of the Alberta Rules of Court? Analysis Prior Judgment Granted in B.C. [23] Xerox relies on an oral, unreported, decision of Voith, J. of the Supreme Court of British Columbia in Xerox Canada Ltd. v.627293 B.C. Ltd. and Raj Vyas aka Rajnikant Vyas dba Mailboxes Etc. #118, granted April 3, 2009. That was a

summary trial decisionunder B.C. Rule 18A. A prior decision of the same Court (different Justice) was granted May 26, 2008 setting aside part of a defaultjudgment. The prior decision, of Justice Rice, is reported (Xerox Canada Ltd. V. 627293 B.C. Ltd.,

(2008) BCSC 725) although thesubsequent oral decision of Justice Voith is not. [24] The case involved similar facts to the ones before me, except that the definition of liquidated damages was different inmaterial way. In the agreement used by Xerox in the B.C. case, the calculation of liquidated damages required a deduction for “anamount equal to the wholesale value of the equipment as established by Xerox in accordance with its internally established accountingprocedures”. The Lease here does not address this deduction. [25] Also, before the

summary trial Justice (Voith, J.) Xerox tendered evidence to the effect that the seized equipment hadminimal value. In this case, there is no evidence whatsoever as to the value of the parts recovered, or whether Xerox made any attemptto discount the equipment to a second-hand equipment dealer or simply re-lease or sell it themselves. The company simply salvagedparts, the value of which is not explained. [26] The 2009

summary trial decision by Voith, J, did not overrule the 2008 Reasons for Judgment of Justice Rice – it was not anappeal, but rather it was a later step taken in the process. However, on the application to set aside default proceedings Justice Riceexamined the “liquidated damages” clause quite closely and said that, “The critical question is whether they [the words of the clause]represent a genuine pre-estimate of loss.” He concluded, at para. 29 that, “In my view, to charge the customer all of the rent for threeyears to the end of the term without a better explanation of the loss is unacceptable.

The amount claimed might well be regarded as apenalty. I would certainly not say at this point that the defence is bound to fail.” [27] At the

summary trial, Voith J. also reviewed the law carefully and, taking into account the fact that the equipment seized wasonly worth $2,000 to $3,000 in total, he concluded that the amount claimed as liquidated damages was a reasonable pre-estimate of thedamages, the clause was enforceable, and Xerox’s alleged failure to mitigate was irrelevant. Liquidated Damages/Mitigation Issues [28] As mentioned above, although I have identified the enforceability of the liquidated damages clause and the mitigation issue astwo separate issues, they are interrelated and it is appropriate to review the “liquidated damages” clause first. [29] With all due respect to the

summary trial decision of Voith, J. in the B.C. case, I have concerns that the clause in question heremay not be enforceable. [30] In my view, the common law calculation of damages, in the absence of a “liquidated damages” clause, would be the presentvalue of the remaining payments on the Lease less the value of the equipment seized, plus the costs associated with the repossession,repair and resale. (Notionally there should be added to that the anticipated fair market value at the expiry of the term of the Lease, but asindicated above it seems clear that that figure was expected to be nominal at best.) That was how damages should be calculated in casessuch as this, as stated in Kineric Tractor Sales Ltd. v.

Langille, (SCC), [1987] 2 S.C.R. 440 at para. 30 and Trexar Inc. v.Beckett, [1996] O.J. No. 1125 (Gen. Div) at para. 23. As well, that was essentially the approach used for the calculation of liquidateddamages in the Xerox agreement that was before the court in B.C. [31] However, here the Lease simply sets out the calculation of that claim as being the present value of the balance of the leasepayments, without any deduction for the value of the repossessed equipment, and in addition it allows Xerox to disable the machine, takeit, and do what it likes with it.

That is, the supposed “reasonable pre-estimate of damages” is nothing more than the entire amount of theloss of rentals that Xerox would suffer, and in addition the company has the right – and it was exercised here – to take the machinesback. [32] It seems difficult to see how this formula can be a “reasonable pre-estimate of damages”. It is a better result than if thecontract had been performed properly.

It is possibly greater than the greatest loss that Xerox could have suffered. [33] The law is well established that where the parties have agreed to liquidated damages in the event of a breach, that clause willbe enforceable, and avoid the need for an assessment of damages, provided that the amount selected is actually a reasonable pre-estimateof damages and not simply a penalty.

[34] Where there is an enforceable liquidated damages agreement, the concept of mitigation of damages is foreign to theadjudication of the claim. Some leading authorities on the topic were reviewed in Hearn Vehicle Leasing Ltd. v. Torres, [2000] O.J. No336 (S.C.). [35] More recently, the Saskatchewan Provincial Court canvassed authorities on the subject in Canadian Linen and UniformService Co. v. ABC Manufacturers of Canada Ltd., 2009 SKPC 88, and in particular that Court reviewed a Supreme Court of Canadadecision, H.F. Clarke Limited v. Thermidaire Corp.

Ltd., (SCC), [1976] 1 S.C.R. 319, where the Court stated, at p.338: The sum will be held to be a penalty if it is extravagant and unconscionable in amount in comparison with the greatest loss that couldconceivably be proved to have followed from the breach. [36] Since Xerox would have been entitled to repossess and sue immediately after the Lease was signed and the goods delivered,had the customer defaulted on the first payment, could the claim here fairly be described as a proper estimate of damages at the outset?

The time for the examination of the clause is at the time the contract was made, not at the time of breach: Sign-O-Lite v. David Henryand Bowlacade, [1993] O.J. 1138, quoted in Canadian Linen and Uniform Service Co. v. ABC Manufacturers of Canada Ltd., [2009]S.J. No. 399, at para.49. Had Xerox repossessed while the equipment was still new, it would have both a claim for the present value ofthe balance of the lease payments and upon repossession it would have whatever the value of the machine was. If it were still new, itwould likely have significant value.

Using the “liquidated damages” clause that it has employed, Xerox would under no circumstancesrecover less than the entire amount of its common law damage claim regardless of when the default occurred, and it might be put in abetter position that if the Lease contract had been performed. [37] Accordingly, the decision of Voith, J. in Xerox Canada Ltd. v. 627293 B.C.

Ltd. and Raj Vyas aka Rajnikant Vyas dbaMailboxes Etc. #118, above, is distinguishable (because the Xerox contract clause there recognized the residual value of the equipment,whereas the clause here does not), and as well it is not binding on an Alberta Court.

Furthermore, I am troubled by the fact that thelearned justice in that B.C. case focussed on an examination of the damages at the time of breach, as opposed to the formulation of anestimate of damages when the contract was made. [38] I do not see that case as determinative of the outcome here. [39] In the circumstances, in my view the case is not free from doubt and therefore the defence of failure to mitigate advanced bythe defendant has some chance of success. Accordingly, on this ground I dismiss the application for

summary judgment. The Evidence Put Forward as to Amount [40] The evidence put forward as to the amount of the claim for liquidated damages is quite unsatisfactory. It may be correct; Isimply cannot tell. [41] The Lease provides that the claim is based on the net present value of the remaining lease payments. A

schedule is putforward that supposedly explains how the amount was calculated. But it does not do that. [42] Firstly, I note that the counsel making the demands seem to have misunderstood what it was they were demanding in the firstplace. [43] The letter from in-house counsel referred to “Repudiation Damages”, capitalized in that fashion as if it were a defined term inthe Lease. I was not referred to any such definition and I cannot find it if it is there. In subparagraph L6(

c) of the Lease there is adiscussion of liquidated damages, and near the end of the subparagraph it says that, “This subsection (

c) represents a genuine pre-estimate of the damages suffered by Xerox upon repudiation and it is not regarded as a penalty by Xerox and Customer.” But the use ofthe expression “Repudiation Damages” leads the reader to try to find a term, and presumably some provision in the Lease, that are notthere. [44] Of more concern is that the amount claimed in that letter appears to have been inflated.

The claim then was for $33,700 andnow it has apparently been calculated to be less. [45] The demand letter from outside counsel totalled several invoices, and it is only after careful examination, armed with theschedule attached to one of the affidavits filed in support of this application, that one is able to clearly determine where the figures camefrom. [46] Secondly, the main concern about the amount of the liquidated damages claim is the calculation, such as it is, set out onExhibit “G” to the General Manager’s affidavit.

The critical information I looked for is the actual calculation of the “discount” on eachpayment. Counsel in oral argument was unable to help. I have reviewed it again and I still have no idea how the figures were reached. Numbers are put forward with no explanation as to how they were arrived at. For example, for the 01/03/2013 invoice (this must meanJanuary 3, 2013), the discount is said to be $238.33. Nowhere does the sheet explain how that figure was arrived at. [47] What concerns me as well is that the heading on the calculation is “Amortization Schedule”.

The calculation in the Leasedoes not call for the amortization of an asset – it calls for the calculation of the net present value of a receivable, which is a differentconcept. The amortization of an asset is to gradually write off the initial cost of the asset over time – an accounting concept employed tospread capital costs over the useful lives of the assets to better reflect the costs incurred during the accounting period being examined. Long-term debts are also said to be amortized, such as a mortgage debt, which may have an amortization period of 40 years.

Thecalculation of the net present value of a receivable involves a different concept. [48] As I have said, the amount claimed here might be correct, but I cannot tell from the evidence provided, and in a

summaryjudgment application the parties – especially the plaintiff, who is trying to show that there are no material issues for trial – are supposedto put their best foot forward.

[ 49 ] Accordingly, on this ground I would also dismiss the application for

summary judgment. [ 50 ] The remaining issue of costs becomes moot if the application for

summary judgment is not granted. However, in the event that I am wrong, I will also consider this issue on a provisional basis. Costs [ 51 ] The final issue I have identified is the claim for solicitor and own client costs. The agreement here does not use the familiar phrase “legal fees and disbursements and other charges on a solicitor client basis” or perhaps even “legal costs on a solicitor client full indemnity basis”.

The Lease says that the calculation of liquidated damages includes, “Any administrative and legal expenses as reasonably determined by Xerox.” [ 52 ] On its face, this purports to take away the Court’s discretion as to awarding costs completely and vest that discretion in Xerox, and, if taken literally, it removes the right of the party being asked to pay the costs (whether they are awarded as party and party costs or solicitor and client costs) to have the amounts reviewed by a Review Officer of the Court. [ 53 ] Neither of these things accord with the law and practice in Alberta, even if the term “legal expenses” were sufficiently clear as to include a complete indemnity on a solicitor and client basis for the legal expenses incurred by Xerox in prosecuting its claim, which it probably is not: Garner v.

Devon Canada Corporation , 2007 ABCA 134 at para. 26 and 27 and National Courier Services Ltd. v. RHK Hydraulic Cylinder Services Inc. , 2005 ABQB 856 at para. 56 . [ 54 ] I would not have awarded costs to Xerox on a solicitor and own client basis had I granted

summary judgment. Conclusion [ 55 ] The claim for liquidated damages advanced by Xerox in the facts of this case is not “plain and obvious”, and the defence of Accurate is not “hopeless”. There is a “genuine issue of material fact” requiring a trial. [ 56 ] Accordingly, the application for

summary judgment is dismissed. Heard on the 27 th day of November, 2013. Dated at the City of Calgary, Alberta this 13 th day of December, 2013. A.R. Robertson M.C.C.Q.B.A. Appearances: Theodore Fong Fasken Martineau DuMoulin LLP for the Plaintiff Winston Tuttle

Winston Tuttle Professional Corporation for the Defendant